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Legislation Watch: Winter 2017

Recent Developments

The I.R.S. gave relief to taxpayers affected by natural disasters. Fall 2017 income tax extension and estimated tax payment deadlines were rescheduled to January 31, 2018 for California wildfire victims (individuals and businesses in Butte, Lake, Mendocino, Napa, Nevada, Sonoma, and Yuba Counties). The same relief was extended to individuals and businesses victimized by flooding and hurricanes in Florida, Georgia, parts of Texas, Puerto Rico, and the Virgin Islands; in addition, hardship withdrawals from 401(k)s and similar employee retirement plans are freely allowed for taxpayers in these four states and two territories through January 31.1,2 

The employer mandate of the Affordable Care Act is now being enforced. In October, the I.R.S. began mailing letters to businesses who had not offered their workers qualifying health coverage under the ACA, notifying these firms of oncoming tax penalties. The targeted non-compliant employers are those with 100 or more FTEs who failed to observe this requirement in 2015. In previous years, the I.R.S. lacked the time and resources to enforce the employer mandate, though businesses with 50 or more workers are required to abide by it.3

The Tax Cuts & Jobs Act

Federal tax laws will change significantly in 2018. The just-passed Tax Cuts & Jobs Act greatly alters key regulations within the Internal Revenue Code. Here is a summary of the major modifications, most scheduled to sunset in 2025 unless renewed:

The estate tax exemption doubles. For 2018, the individual exemption rises from $5.6 million to $11.2 million. The exemption for married couples rises from $11.2 million to $22.4 million. Wealth Management estimates that less than 1,000 estates per year will be taxed with these new thresholds in place.4,5

The largest corporate tax cut in American history takes effect. In 2018, the top corporate tax rate falls from 35% to 21%. This cut is further enhanced by three other tax perks geared to large firms. The current tax code encourages corporations to hold cash abroad with a heavy tax on repatriated earnings; the Tax Cuts & Jobs Act slashes that tax to a mere 15.5%. In addition, companies can deduct 100% of the costs of new capital equipment purchases for five years, and the ceiling on Section 179 expensing doubles to $1 million.4,6

Taxation of LLCs, S-corps, and partnerships changes dramatically. Most pass-through business entities can now deduct 20% of their qualified business income from federal income taxes. The word to remember here is “most.” Law, health care, and professional services firms can only claim this deduction if the household taxable income of the business owner(s) falls below $315,000 (joint filers) and $157,500 (other filing statuses).6

The 20% deduction on pass-through business income also applies to qualified REIT dividends. It is also allowed for qualified publicly traded partnership income.7

The 1031 (“like-kind”) exchange rule now only applies for real property. Other types of like-kind exchanges are disallowed.7

Many Americans may pay lower taxes in the short term. Adherents of the Tax Cuts & Jobs Act claim the tax savings will amount to about $2,000 a year for the “typical” family; this may vary widely from household to household. Next year, 47.5% of Americans are projected to pay no income taxes because of the Act; that would be a 3.5% increase from 2017.4

The Alternative Minimum Tax phase-out thresholds increase greatly. Currently, these thresholds are set at $120,700 for individuals and $160,900 for married couples. For 2018, they jump north to $500,000 for individuals and $1 million for married couples.4

The corporate AMT dies. This will permit even greater tax savings for businesses and promote more R&D and capital investment.4

The individual health care mandate will be eliminated. This will happen in 2019, not 2018. The extra year will give lawmakers time to consider ways to stabilize rising health care premiums.4

Income tax brackets have been revised. The 10% bracket remains in place, with the other six brackets now set at 12%, 22%, 24%, 32%, 35%, and 37%.6

The personal exemption has been eliminated. This amounts to a kind of trade-off given the near-doubling of the standard income tax deduction.6

The standard income tax deduction increases to five figures. The Tax Cuts & Jobs Act raises the standard deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples.6

Most itemized deductions are gone. Among the ones retained: the charitable contribution deduction, the mortgage interest deduction, the state and local tax (SLAT) deduction, the student loan deduction, the medical expense deduction, and tuition waivers for graduate students. The mortgage interest deduction now has a $750,000 ceiling (it was $1 million). The SLAT deduction is now restricted to a combined $10,000 for forms of income, sales, and property tax (note that taxes paid or accrued in carrying on a trade or business are not limited to the $10,000 cap). Regarding medical bills, taxpayers can deduct medical expenses equal to 7.5% or more of their incomes for tax years 2017 and 2018, rather than the 10% norm.4,6

The Child Tax Credit doubles. The Tax Cuts & Jobs Act increases the CTC to $2,000. The first $1,400 of the credit is refundable, and the phase-out threshold now starts much higher at $400,000 for married couples.6

Looking Ahead

New Jersey will do away with its estate tax in 2018. This year, its state government lifted its lifetime exemption amount from $675,000 to $2 million. The abolition of this tax will be a relief to many Garden State millionaires, as New Jersey had the smallest estate tax exemption of any of the 50 states.

No start date has been established for the 2018 federal tax season. While some media outlets have stated that the I.R.S. will accept 1040 forms starting on January 22, the agency says that this is pure speculation, and that it will announce its filing season start date very late in 2018.8

I.R.S. issues reminder about expiring ITINs. On December 31, all Individual Taxpayer Identification Numbers not used within the past three years will expire as well as all ITINs issued prior to 2013 with middle digits of 70, 71, 72 or 80. The agency advises affected taxpayers to renew their ITIN before filing their 1040s for TY 2017. ITINs that expired in 2016 having middle digits 78 and 79 may also be renewed.9

 

 

 

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Citations.

1 – irs.gov/newsroom/irs-gives-tax-relief-to-victims-of-california-wildfires-extension-filers-have-until-jan-31-to-file [10/13/17]

2 – irs.gov/newsroom/irs-offers-help-to-hurricane-victims-a-recap-of-key-tax-relief-provisions-available-following-harvey-irma-and-maria [9/26/17]
3 – nytimes.com/2017/11/16/business/irs-health-insurance-mandate.html [11/16/17]

4 – taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ [12/18/17]
5 – wealthmanagement.com/estate-planning/estate-planning-implications-gop-tax-plan [11/6/17]
6 – washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/ [12/15/17]
7 – fool.com/retirement/2017/01/22/estate-planning-in-2017-heres-what-you-need-to-kno.aspx [1/22/17]
8 – irs.gov/newsroom/irs-statement-on-2018-filing-season-start-date [11/3/17]
9 – irs.gov/newsroom/whats-hot [12/7/17]

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